Questcor Pharmaceuticals Inc.'s primary product is Acthar, which is used to treat multiple sclerosis flare-ups, as well as a kidney disorder. HANDOUT IMAGE

The road to a $30,000 drug

• 2001: Questcor Pharmaceuticals paid a reported $100,000 to Aventis in 2001 for worldwide rights to Acthar Gel, which didn't have enough of a market to be profitable.

• 2001-2006: Questcor continued to lose money on the drug.

• 2007: With the arrival of Don Bailey as CEO, the company raised the price of Acthar from an estimated $1,650 per dose to $23,000, announcing that the cost of a full course of treatment could be $80,000 to $100,000. Questcor turned its first profit that year.

• 2010: Questcor won an "orphan drug" designation from the FDA, allowing it seven-year exclusivity to market Acthar for a condition known as infantile spasms. That designation has helped the company justify the high price, although critics note that most of its sales are now for other conditions.

• 2014: Acthar now retails for $30,000 a dose, though Blue Shield of California said its claims for the drug cost closer to $40,000.

Questcor Pharmaceuticals of Anaheim, which sells a hugely profitable drug for about $30,000 a dose and is under the scrutiny of multiple federal agencies, said Monday it has agreed to be acquired by Dublin, Ireland-based Mallinckrodt PLC for $5.6 billion.

The deal, if approved, would create an international specialty pharmaceutical company with annual sales of about $3.6 billion – and rising.

Mallinckrodt, whose main operations are in Missouri despite its Irish headquarters, would benefit handsomely from Questcor’s drug, Acthar Gel, which is used to treat a wide range of inflammatory and autoimmune diseases.

Acthar generated virtually all of Questcor’s $799 million in sales in 2013, when the company reported net income of $292.6 million – a whopping profit margin of 36.6 percent. Though the drug retails for about $30,000 a dose, one major California insurance company said its claims for the drug typically cost closer to $40,000.

Mallinckrodt, which sells high-end prescription pain medications, had three times Questcor’s revenue but only about one-tenth the profit margin. Questcor, measured by its total stock market value, is actually the larger of the two companies.

High-cost drugs used to treat a number of complex chronic diseases – cancer, HIV, multiple sclerosis and arthritis, to name a few – are a growing trend in the pharmaceutical industry, in part because they sell for tens of thousands of dollars, and in some cases even more.

The deal marks one of the largest acquisitions of an Orange County company in recent memory. Just last month, Facebook bought Irvine-based virtual reality goggle maker Oculus for $2 billion. In a big insurance-industry merger in 2005, UnitedHealth Group paid $8 billion for Cypress-based PacifiCare Health Systems.

The merger of Mallinckrodt and Questcor will provide diversification and prove to be a “strong and sustainable platform for future revenue and earnings growth,” Mark Trudeau, the president and CEO of Mallinckrodt, said in a press release. Mallinckrodt is a spinoff of Ireland-based surgical instrument maker Covidien Plc.

The Mallinckrodt-Questcor deal is also expected to create a sizable tax break that should help widen the profit margins on Acthar even further.

Ireland is a well-known tax haven for global corporations: U.S. companies that have recently moved their headquarters to Dublin through mergers range from industrial equipment maker Eaton to banana seller Chiquita Brands.

Ireland has tussled in recent years with other European countries over its extremely low corporate tax rate, which is 12.5 percent. The corporate rate in the U.S., by contrast, is 39.1 percent, though many American firms pay far less than that on average – precisely because of their overseas operations.

The two companies, in a joint press release, noted the tax benefits that would “derive from Mallinckrodt’s Irish domicile.”

Questcor’s stock, which had rallied last week, soared on the news to close at $80.58, up 18.7 percent from Friday – though that was still short of the $86.10 per share value that the cash and stock deal puts on the company.

Despite the market’s happy reaction, the acquisition was already stirring controversy. Shortly after it was announced, two law firms said they would investigate whether Questcor was giving away the keys to the kingdom too quickly and cheaply.

Pomerantz LLP, a nationwide plaintiff class-action law firm, suggested that Questcor’s directors may be “breaching fiduciary duties by failing to adequately shop the company and maximize shareholder value.”

Controversy is nothing new to Questcor, which has been under a cloud of it for the past two years related to its marketing practices, the stock purchases of its executives and, more recently, the actual contents of the drug it is selling. Questcor declined to answer questions about the deal Monday.

In 2012, the company said it was being investigated by the federal government. The following year, it revealed that more federal agencies, including the Securities and Exchange Commission, had joined the investigation.

Last month, Questcor‘s stock price took a big hit when a newsletter known as Citron Research said it had sent Acthar to two independent testing laboratories and determined that the drug contained none of the pig hormone that is its purported active ingredient.

The U.S. Food and Drug Administration said it was reviewing the lab tests. An FDA spokeswoman said Monday that the review is ongoing.

Questcor was also the target of a New York Times story that suggested the company may have timed the release of good news to maximize the share price before the regularly scheduled stock sales of its CEO, Don Bailey.

Andrew Left, founder and editor of Citron Research, and a short seller – someone who bets on shares falling – said that in his view, Questcor’s motive for selling now is “for the insiders to get liquid and get out.”

For Mallinckrodt, which inherits the troubles hanging over Questcor, the motive is less obvious, he said. “If I am a shareholder of this company, am I happy or not happy today? I would say, ‘What are we doing buying somebody else’s headache?’”

But Left conceded that it could be a long time before any of the federal investigations into Questcor lead anywhere – if they ever do.

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